Rights issue -good or useless instrument?

A year ago, Bucharest Stock exchange launched in premiere the rights issue. The initial public offering of Transgaz Medias was the first one that had rights issue enclosed. However, a year after this premiere, the instruments have been used only twice. Specialists polled by Wall-Street explained that the measure was welcomed for the market, but the crippled climate and investors’ reticence have not supported their development.

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Implementation of rights issue was a welcomed measure

Rights issue are short-term negotiable securities, which certifies the shareholder’s right to receive a share which will be assigned to him, when a common capital raise will be registered at the Central Depository.

“Introduction of rights issue was a natural stage in the development of stock transactions and was one of the positive measures taken by BSE board. On the large stock markets, these products are frequently used by investors, and their trade is an advantage in drawing investors at a public offering or a common capital raise,” said Florin Irmin, broker at Intercapital Invest.

“Introduction of rights issue was and surely still is welcomed, as the period when investors can enhance the value of shares from a public offerings, has been shortened from few months to few days. This instrument is also a protection tool against bureaucracy, because they don’t have to wait for the completion of the legal proceedings of registering the equity raise”, said Vlad Doruc, financial analyst at Vanguard.

For example, if we take a close look at other old IPOs, we will notice long time intervals between the date of the IPO and the moment of listing shares at BSE (for example, in case of Alumil, it took four months, and Contor Group shares are still not traded yet), he explained.

“In these cases, investors were not able to fructify their stock, which is a loss, if we consider the higher return they could have marked by directing the respective amounts towards other investments. In the event of a mass depreciation of stocks, we can say the rights issue have secured protection to investors and even earnings, such as those who sold rights issue in Transgaz IPO”, the analyst added.

It must not be omitted the fact that they are risky instruments. “Those who buy them, are likely to mark down losses in the event of a cancellation of capital raise”, Doruc added.

In the past year, six public offerings took place at BSE, and only three of them used the rights issue. The only one that had success was Transgaz; Teraplast’s rights issue underwent a major depreciation, and Pomponio’s IPO failed, without using the instruments any longer.